The paper stated this is due to historically low interest rates, the increase in business and consumer confidence, the fall of the Australian dollar, five-year highs for equity markets, a recovery in the housing market and a change in government.
Signs of a possible economic recovery in the United States, UK and Europe and the stabilisation of China could also boost economic activity in Australia, according to the report.
Head of financials research at Morningstar David Ellis said the recovery would be most prominent along the east coast of Australia, with banks, insurers and wealth managers the key beneficiaries of the recovery. The research house predicted the major banks would continue to deliver profits and dividends, in contrast to the view of bank sceptics.
“Any prospective change to economic conditions (whether positive or negative) will have no impact on upcoming earnings results for the three major banks reporting in late October and early November,” said Mr Ellis.
Despite the slow economic growth over the past year, Mr Ellis said ANZ Bank, National Australia Bank and Westpac all had strong profit certainty due to their enduring competitive strengths, earnings potential and pricing power.
High profit growth and dividend growth would provide retail shareholders with an “enduring and growing fully-franked dividend income stream,” he added.
Mr Ellis said earnings growth for the rest of the banking sector would be influenced by credit and loan growth, ongoing benign bad debts and continual improvements in productivity targeting cost control and business simplification. According to the outlook, bad debts as a percentage of gross loans had fallen significantly from the 2008/2009 figures.
Information from the Reserve Bank of Australia showed credit growth had been declining since 2009. However, Mr Ellis said they expected growth to stabilise and begin to recover with the record low interest rates and an increase in investor confidence.
Mr Ellis said the outlook for insurers is also positive, with higher targeted cost savings and core business profits expected to grow over the next five years. The report listed higher premiums, improved productivity, stronger investment markets and benign weather conditions as factors supporting earnings growth in the short term.
The outlook also stated there has been an improvement in property and infrastructure stocks. Mr Ellis said the negative recommendations on most Australian real estate investment trusts in May this year had now grown to levels considered fair or better.
